II.

Structural-Change Models

 The Lewis theory: two-sector model,

agriculture & industry. Surplus labor in
agriculture, workers migrate to industry
leading to self-sustaining growth.

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 Figure 3.1

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Lewis model (continued)

 Profits are made in the industrial sector, this

is shown as the area of the triangle below
marginal product of labor & the wage.
 Profits are automatically reinvested in the
sector which shifts the marginal product and
total product curves upward.
 The story continues forever assuming an
infinite supply of labor indicated by the
horizontal line SL.
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Lewis Model (criticisms)

 Assumes no capital flight, the profits are

reinvested in industry and not abroad.
 Assumes full employment in industry and
surplus labor in agriculture.
 Assumes competitive labor markets, no
rigidities, etc…
 Assumes perfect mobility of labor.
 Assumes no labor-saving technology, as we
see next…
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Figure 3.2

Demand for labor increases, but

quantity of labor is unchanged.

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Lewis Model (criticisms)

 Economic development takes place via the

absorption of labor from the subsistence
sector where opportunity costs of labor are
very low. However, if there positive
opportunity costs, eg. loss of crops in times
of peak harvesting season, labor transfer
will reduce agricultural output.

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Lewis Model (criticisms)

 Absorption of surplus labor itself may end prematurely

because competitors may raise wage rates and lower the
share of profit. It has been shown that rural-urban
migration in the Egyptian economy was accompanied by
an increase in wage rates of 15 per cent and a fall in profits
of 12 per cent. Wages in the industrial sector were forced
up directly by unions and indirectly through demands for
increased wages in the subsistence sector, as payment for
increased productivity. In fact, given the urban-rural wage
differential in most poor countries, large scale
unemployment in now seen in both the urban and rural
sectors.

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Lewis Model (criticisms)

 The Lewis model underestimates the full impact

on the poor economy of a rapidly growing
population, i.e. its effects on agriculture surplus,
the capitalist profit share, wage rates and overall
employment opportunities. Similarly, Lewis
assumed that the rate of growth in manufacturing
would be identical to that in agriculture, but if
industrial development involves more intensive
use of capital than labor, then the flow of labor
from agriculture to industry will simply create more
unemployment.

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Lewis Model (criticisms)

 Lewis seems to have ignored the balanced

growth between agriculture and industry.
Given the linkages between agricultural
growth and industrial expansion in poor
countries, if a section of the profit made by
the capitalists is not devoted to agricultural
development, the process of
industrialization would be jeopardized.

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Lewis Model (criticisms)

 Possible leakages from the economy seem to have been

ignored by Lewis. He assumes boldly that a capitalist's
marginal propensity to save is close to one, but a certain
increase in consumption always accompanies an increase in
profits, so the total increment of savings will be somewhat
less than increments in profit. Whether or not capitalist
surplus will be used constructively will depend on the
consumption- saving patterns of the top 10 percent of the
population. But capitalists alone are not the only productive
agents of society. Small farmers producing cash crops in
Egypt have shown themselves to be quite capable of saving
the required capital. The world's largest cocoa industry in
Ghana is entirely the creation of small enterprise capital
formation.

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Lewis Model (criticisms)

 The transfer of unskilled workers from

agriculture to industry is regarded as almost
smooth and costless, but this does not
occur in practice because industry requires
different types of labor. The problem can be
solved by investment in education and skill
formation, but the process is neither smooth
nor inexpensive.

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Lewis Model (criticisms)

 The model assumes rationality, perfect

information and unlimited capital formation
in industry. These do not exist in practical
situations and so the full extent of the model
is rarely realised. However, the model does
provide a good general theory on labour
transitioning in developing economies. [5]

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 Lewis Model (criticisms)

 The Lewis model was applied to the Egyptian economy by Mabro in 1967 and
despite he proximity of Lewis's assumptions to the realities if the Egyptian situation
during the period of study, the model failed firstly because of Lewis seriously
underestimated the rate of population growth and secondly because the choice of
capital intensiveness in Egyptian industries did not show much labor using bias
and as such, the level of unemployment did not show any tendency to register
significant decline.
 The validity of the Lewis model was again called into question when it was applied
to Taiwan. It was observed that, despite the impressive rate of growth of the
economy of Taiwan, unemployment did not fall appreciably and this is explained
again in reference to the choice of capital intensity in industries in Taiwan. This
raised the important issue whether surplus labor is a necessary condition for
growth.

 This model has been employed quite successfully in Singapore. Ironically however
it has not been employed in Sir Arthur Lewis' home country of St. Lucia.

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